Jerome Powell, in his days on the Fed board before he was raised to the presidency, urged Ben Bernanke to announce a recovery effort to stimulate the economy, although he felt that there could be more than a little volatility in the financial markets, according to releases of the Federal Reserve meetings in 2013 released on Friday.
"We have to jump," told Powell Bernanke and his colleagues.
In question was the third round of Fed's asset purchase program, known as QE3, which had been going on since September last year. The Fed bought $ 85 billion a month in government debt and securities in an open program.
Outside of public view, Powell was one of the "three amigos" who became unpleasant with the purchases. "As Jay told me, we needed an" off ramp, "Bernanke told in his memoir," The Courage to Act. "Powell pushed for an" off ramp. "
See: Jerome Powell Fed Means for Investors and Finance
This notion of" debilitating "asset purchases received increased support from Fed officials in early 2013 , but the market remained largely unaware.
The Fed made a plan where Bernanke would point out during his press conference that the central bank planned to reduce asset purchases later in 2013.
Bernanke basically said the market reaction should be positive, considering that uncertainty is being reduced.
"But a conversation that begins by saying how to reduce the purchasing speed is likely to have some short-term negative effects , "He said, a according to the transcripts.
" The more time I've spent on markets, the less I believe in my own ability to predict them. "
Powell was enthusiastic despite the risks. He said it was time to give the market a "road map of our thinking about reducing purchases" because the Fed still bought assets despite the economy being better.
"The only question is, to which ceiling should we skip which alley? So there is no risk-free path. This is the best way, and I'm glad we have landed on it," he said. "I'm not worried about a little volatility, but I have to say I'm worried that there might be more than this," Powell said, adding that he was frustrated in trying to measure the market reaction.
The more time I've spent on markets, the less I believe in my ability to predict them, Powell said.
Bernank's message hit the market as a thunderbolt. Stock
overdue and bond yields
TMUBMUSD10Y, [1.45%] 1.70%
nailed as much as an entire percentage point. The episode became known as "tapered tantrum".
The episode fundamentally changed the way the Fed conducted the balance sheet.
In 2016, Fed Chairman Janet Yellen quoted the tapered tantrum as a reason not to tighten monetary policy by reducing the balance sheet. The Fed turned instead to raise its traditional short-term interest rate tool.
Read: Yellen explains why the Fed did not lower the balance sheet to tighten the policy
Only after interest rates were higher, the Fed started a program to shrink its asset purchases.
The transcripts, released by the Fed every year after a five-year delay, show that pigeons at the June meeting considered delayed in announcing a reduction in purchases.
"I do not see the situation as an emergency at this stage," said Minneapolis Fed President Narayana Kocherlakota.